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Afterthought

13 April 2018

Trump’s Trade War

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Lurking behind the US president’s economic agenda is a bigger problem

TRADE WARS ARE not new. If anything, free trade is an exception to mercantilism practised in one form or another. Yet, there is something to be said about the looming end of the current system of free trade that began with the signing of the General Agreement on Tariffs and Trade (GATT) in October 1947. There are no two ways of looking at the situation after US President Donald Trump imposed a 25 per cent tariff on steel and 10 per cent on aluminium imports. Coming from the country that single-handedly pushed freedom of trade since World War II, this is especially ominous for a world full of barriers against goods, ideas and people.

In theory, Trump’s measures are aimed at Asian countries like China and South Korea, which he accuses of unfair practices. In reality, these measures affect the entire world as the US has specified that exemptions will be made on a case-by-case basis, a classic recipe for trade preferences and mercantilism.

Behind Trump’s measures lies an attempt to fix two problems that plague the US economy. One, the loss of jobs in core industries like steel and automobile manufacturing; and two, the country’s vast trade deficit. On both counts, tariffs are unlikely to work. Anne Krueger, a renowned trade economist and an intellectual force behind trade liberalisation worldwide, has said that erecting barriers against foreign steel and aluminium may save a handful of jobs in America’s metals sector, but will lead to far heavier job losses in those industries that are dependent on cheap imports of these metals. Similarly, the big macroeconomic problem of the US is one of savings and investment, and trying to reduce the trade deficit won’t address that.

Lurking behind these economic calculations is a much bigger problem. Offering open market access to once-poor Asian economies like South Korea, Indonesia, Malaysia and Thailand helped Washington keep them away from communism. Their rapid export-led growth and rejection of a self-defeating import substitution policy had a disproportionate political effect on Asian geo- politics of the 20th century. These countries were part of the international movement in favour of institutions like the World Trade Organization. If the US retreats from the global arena—as it is doing now—China will want to take its place. That won’t be an easy world to live in.